Although there is no clear legal definition of what exactly constitutes a PSC, in most freelancing circles it is widely regarded as an arrangement with the following characteristics:
- A UK registered limited company.
- The contractor acts as a director of the company.
- He or she is the sole shareholder of the company, though sometimes shares will be split 50/50 with a spouse.
- The contractor manages and controls the company's bank account.
- The contractor supplies professional services to agencies / clients via the PSC.
The main benefit of a PSC is that if you can be judged to
be 'self-employed' under current HMRC guidelines, then
you will be able to pay yourself a small salary and get most of
your income from dividends. Dividends aren't subject to
National Insurance contributions (NICs) and attract a much
lower rate of income tax compared to the higher rate tax
bands. Below is a brief overview of the advantages and
disadvantages of setting up your own PSC.
- It is the most tax efficient way of working if you are outside of IR35.
- You can claim a wider range of expenses.
- It enables you to access the Flat Rate VAT scheme.
- You keep complete control of your financial affairs meaning you do not have to risk. your money with any third party administrator.
- It gives you greater opportunity for tax planning than PAYE Umbrella.
- Some of the paperwork can be complicated and you may need to pay an accountant to do a lot of the work for you.
- It can be costly if you contract for a very short period of time, then go back to permanent employment.
- You will be responsible for issuing invoices, and may have to spend a lot of time chasing late payments.
- There is a lot to set up, such as a business bank account.
- It's not ideal for contracts less than £25k per year.